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Deposits & Borrowing by Private and Public Limited company

Section 73 to 76 of the Companies Act, 2013 read with Companies (Acceptance of Deposits) Rules, 2014 made under Chapter V of the Act regulate the invitation and acceptance of deposits. It prohibits acceptance of deposits except from the members through ordinary resolution or acceptance deposits by ‘’eligible company’’ being a public company, subject to conditions specified in the rules. (Eligible company is defined under the rules based on net worth and turnover).

The Act read with the Rules also deals with various aspects including prohibition of acceptance of deposits except from the members, subject to conditions,inclusive definition of deposit, eligible company, depositor etc., conditions for acceptance of deposits such as approval of shareholders in a general meeting, credit rating, provision of deposit insurance, trustees of deposit holders etc., In addition the act protect the interest of depositor through Section 37 and 245(class action suit by requisite number of depositors)of the Act.

In addition the act provides for stringent penalty for any violations in complying with the provisions of this Act, in this regard.

Proviso to Section 73(1) read with rule 1(3) of Companies (Acceptance of Deposits) Rules 2014 excludes banking Companies, non-banking financial companies as defined in the Reserve Bank of India Act, 1934 and registered with Reserve Bank of India, a housing finance company registered with National Housing Bank established under the National Housing Bank Act 1987 and any other company as may be specified by the government in this regard.

A. Private Limited Company: As per definition of Private limited Company as given under section 2 clause 68 of Companies Act, 2013. Private Company means a Company which by its articles prohibits any invitation to the public to subscribe for any securities of the company.

Source of receiver of Money for Private Limited Company:

The Principal Rule 2(1) (c) of Companies (Acceptance of Deposits) Rules, 2014 lists out the “exempted deposits” under the applicable provisions of the Companies Act, 2013. Let’s discuss in brief here, then will discuss below:

1. Receiving of Money from any Company. Or;

2. Receiving of Money from Directors. or;

3. Receiving of Money from Relative of Directors. or;

4. Receiving of Money from State Government & Central Government. ETC.

5. Receiving of money from the Members subject to compliance of provision of Section 73 read with rules.

B. Public Company: There is no such restriction for the Public Company to accept deposit from the public.

Source of receiver of Money for Public Limited Company:

The Principal Rule 2(1) (c) of Companies (Acceptance of Deposits) Rules, 2014 lists out the “exempted deposits” under the applicable provisions of the Companies Act, 2013. Let’s discuss in brief here, then will discuss below:

1. Receiving of Money from any Company. Or;

2. Receiving of Money from Directors. or;

3. Receiving of Money from State Government & Central Government. ETC.

4. Receiving of money from the public subject to compliance of provision of Section 73 read with rules.

TABLE SHOWING DIFFERENT PERSONS & COMPANY STATUS WHETHER LOAN CAN BE ACCEPTED WITHOUT FOLLOWING THE PROVISION OF SECTION – 73

S. No.

Loans from

Public Limited

Private Limited Company

1

Director

Rule 3(1)(viii)

Yes, can accept, but the director will give a Declaration in writing that money is not given out of borrowed funds and company will disclose it in the Board's report.

Rule 3(1)(viii)

Yes, can accept, but the director will give a Declaration in writing that money is not given out of borrowed funds and company will disclose it in the Board's report.

2

Relatives of Director

No can’t Accept

Rule 3(1)(viii)

Yes, can accept, but the relative will give a Declaration in writing that money is not given out of borrowed funds and company will disclose it in the Board's report. [NOTE-1]

3

Employee

Yes, can accept up to the employee’s annual salary (there should be a contract of employment with the company) in the nature of non- interest bearing security deposit.

Yes, can accept up to the employee’s annual salary (there should be a contract of employment with the company) in the nature of non- interest bearing security deposit.

4

Any other Individual

Can accept after follow the compliances of Section 73 read with relevant rules

Can’t accept because it is prohibited by the definition of Private Company.

5

Proprietorship Firm ;

Can accept after follow the compliances of Section 73 read with relevant rules

Can’t accept because it can’t be director, Member or relative of Director.

6

HUF

Can accept after follow the compliances of Section 73 read with relevant rules

Can’t accept because it can’t be director, Member or relative of Director.

7

Partnership Firm

Can accept after follow the compliances of Section 73 read with relevant rules

Can’t accept because it can’t be director, Member or relative of Director.

8

Any Company

Yes, can accept.

Yes, can accept.

9

Banks

Yes, can accept.

Yes, can accept

10

Trust

Yes, can accept.

Yes, can accept, but loan received should be non- interest bearing.

11

Outside India

Yes, can accept.

Yes, can accept, but subject to the provisions of the Foreign Exchange Management Act, 1999 and rules and regulations made there under.

12

Govt. organization

(eg. SIDBI)

Yes, can accept.

Yes, can accept

FAQ’s on Acceptance of Deposit and Borrowing (Without compliance of section 73 and relevant rules):-

[5] Complete process is given under article series no. 148 written by CS Divesh Goyal.

Whether Company can accept deposit from the Members?

Private Limited Company Clause (a) to (e) of Section 73(2) will not be applicable on Private Limited Company if deposit is up to 100% of paid up share capital, Free Reserve and security premium account.

If Company wants to accept deposit from the members more than 100% of paid up share capital, Free Reserve and security premium account. Then Company has to follow complete section 73 read with relevant rules.

Private Limited Company No eligible company shall accept or renew- (a) any deposit from its members, if the amount of such deposit together with the amount of deposits outstanding as on the date of acceptance or renewal of such deposits from members exceeds ten per cent. of the aggregate of the paid-up share capital and free reserves of the company;

Sr No

Question

Private Limited

Public Limited

(Yes= only if not required to follow Section 73)

1.

Whether LLP can give Loan to Company under this exemption

NO,

LLP can’t give loan to Private Limited Company under this Clause. Because this clause cover only Company not Body Corporate

No,

LLP can’t give loan to Company under this Clause. Because this clause covers only Company not Body Corporate.

2.

If deposit in the joint name of director and other person then how it will be treated? -

Allowed.

A deposit in joint names of director and another person, who may or may not be director, should be permissible, if name of director is first depositor, though there is no specific provision.

Allowed.

A deposit in joint names of director and another person, who may or may not be director, should be permissible, if name of director is first depositor, though there is no specific provision.

3.

If a person ceases or resign from the post of director after giving loan then such loan will be considered as deposits or not?

Not.

Requirement of director will be check at the time of receipt of amount. Thus, later he may cease to be a director.

Not.

Requirement of director will be check at the time of receipt of amount. Thus, later he may cease to be a director.

4.

Loan from HUF?

NO,

HUF can’t give loan to Private Limited. Because its neither Company nor relative of director.

No,

HUF can’t give loan to Company.

5.

Loan from FIRM?

NO,

Partnership Firm can’t give loan to Private Limited. Because its neither Company nor relative of director.

No,

Partnership Firm can’t give loan to Company.

6

Loan from Non Relatives?

Can’t Accept.

Accept only after compliance of provisions of Section 73.

Disclosures in the Financial Statement

This is a new insertion in the form of Rule 16A. The following disclosure by a company in its financial statement by way of notes is now mandatory:

S. No.

To be disclosed by

Disclosure Particulars

1

Every Company

Amount Received from Director

2

Every Private Company

Amount Received from Relative of Director

Requirement of Obtaining Deposit Insurance

This amendment is made to rectify the inconsistency. The provisions of Section 73(2)(d) of CA 2013 read with the Principal Rule 5 provides that companies accepting deposits shall enter into a contract for providing deposit insurance in the manner stipulated therein.

However, as of now, deposit insurance product is not available. Hence, in order to plug the gap, the Amendment Rules extend the time limit for obtaining deposit insurance till 31st March, 2017 or till availability of a deposit insurance product, whichever is earlier.

Date Chart for the Dates of applicability of provisions of Borrowings and Deposits.

Date Chart for the Dates of applicability of provisions of Borrowings and Deposits.

S. No.

Section

Provision

Section Effective

Exemption

1

179(3)

Borrow any amount of Money Need Board Resolution

01.04.2014

2

180(1)C

If borrowing more than 100% of paid up share capital + Free reserve then Need Special Resolution

12.09.2013

05.06.2015

This Section not applicable on Private limited Company from 05.06.2015